Question

Suppose $1 = 120 yen in new york, $1 = 2 euros in london, and 1 euro = 75 yen in tokyo. a speculator with $1 million would get a profit of _____ by engaging in a 3-point arbitrage.

a.$1.20
b.150,000 yen
c.$250,000
d.$1.25 million

Answer 1

Change $ to euro
$1 = 2 euro
$1 000 000 = 2 000 000 euro

Change the euro to yen
1 euro = 75 yen
2 000 000 = 75 x 2 000 000 = 150 000 000 yen

Change the yen back to $
120 yen = $1
1 yen = $1/120
150 000 000 yen = 1$ 250 000

Profit = 1 250 000 - 1 000 000 = $250 000 (Answer C)